Insurance Lingo 101: the Six Principles of Insurance

The best insurance companies follow the seven main principles of insurance. If you are in the market to buy insurance, familiarizing yourself with these concepts will help you understand the insurance company’s point of view before you sign on the dotted line.

Utmost Good Faith

The first and most important of the seven principles of insurance is utmost good faith. In most businesses, the buyer is responsible for finding out every detail of the deal before they sign up. In the insurance world, however, the insurance company is supposed to make sure that the customer fully understands everything about the deal before they agree to pay for coverage. Trustworthy insurance companies will never leave you out of the loop and will always make sure that you know your rights and responsibilities. Illegal insurance companies, however, will try to pull the wool over your eyes. If an insurance company refuses to answer your questions, your best bet is to go with another insurance provider.

Insurable Interest

Insurance companies won’t insure something that you don’t care about or rely on to make money. If you are a professional ice cream taster, for example, you can take out insurance on your tongue. If you don’t depend on your sense of taste to make a living, though, no insurance company will insure your taste buds.

Indemnity

Indemnity is the concept that an insurance company is only responsible for giving you just enough money to compensate your loss. In other words, policyholders shouldn’t be able to earn a profit by having an accident. If you get in a car accident, the insurance company won’t buy you a brand new Ferrari unless that was the kind of car you were driving before you got into a wreck.

Proximate Cause

The thing that caused the accident is called the proximate cause. Insurance companies only pay for particular kinds of accidents caused by certain kinds of proximate causes. If you have fire coverage, for example, that coverage won’t help you in the event of a flood– you have to buy separate flood coverage for that.

Subrogation

Out of all the principles of insurance, subrogation is perhaps the hardest concept to understand because it deals with the ability to issue lawsuits. The insurance company loses money when you collect, but they get it back by suing the person who caused the accident. Subrogation gives the insurance company the authority to sue the person that caused the accident on your behalf.

Double Insurance

The last entry on our principles of insurance list is double insurance. The principle of double insurance prevents you from making a profit in situations where it makes sense to carry two kinds of insurance. It is legal to take out double insurance if you are concerned about multiple proximate causes (for example, fire and flooding) but you can’t receive an insurance payment for more than the total cost of whatever it is that you insured. In other words: just because you paid for double insurance doesn’t mean that your payout will be twice as large after an accident.